7 minute read
That’s settled?
The recent announcement that the European Securities and Markets Authority (ESMA) has postponed the application of the European Central Securities Depositories Regulation (CSDR) mandatory buy-in regime by no less than three years, has made headlines across the financial world.
This controversial aspect of the legislation would have obliged trading parties to execute buy-ins against any counterparties that were unable to settle within a certain timeframe. This saw the securities industry and regulators at loggerheads, with the former contending it could lead to increased costs, reduced liquidity and reduced returns for investors.
However, after intense lobbying and pushback, the ESMA issued a report, confirming that the introduction of mandatory buy-ins would be delayed until November 2025, saying: “Considering the potential duplicative implementation costs for market participants in case extensive changes would be made to the existing buy-in measures, ESMA hereby suggests to formally suspend the application of the provisions on the mandatory buy-in regime set out in the RTS on settlement discipline.”
The CSDR, of course, aims to improve the safety and security of settlement and create a level playing field among central securities depositories (CSDs) in the EU. The buy-in provisions were intended as a remedy for failed trades, giving the purchaser a contractual right to buy securities, despite the failure of the initial transaction, and restoring the counterparties to the position they would have been in had the transaction completed – with the failing participant likely to be penalised.
So, a win for those who consider the delayed implementation something of a disaster averted. But there are a significant number of failed trades still happening, despite the implementation of the new framework designed to prevent them (banks are being hit with up to €5million in CSDR penalties per month as settlement rates deteriorate). The payments industry, therefore, faces a number of ever-changing challenges.
According to head of client connectivity and data at Clearstream, Priya Sharma, all this throws into sharp relief the need for good, high-quality data, post-implementation of the CSDR settlement regulation.
“We are currently looking at various data products to really support our clients,” she says. “In the post-trade industry, we look at market, transaction, event, tax, regulatory data, to name a few. We can always use data to create better insights, internally, for our businesses, to help them better understand their performance, but at the same time understand how this data is being used by our clients and at what interval.”
Clearstream is an international central securities depository (ICSD), based in Luxembourg, providing post-trade infrastructure and securities services for the international market and 59 domestic markets worldwide, with customers in 110 countries. As a central securities depository (CSD), based in Frankfurt, it also provides the post-trade infrastructure for the German securities industry, offering access to a growing number of international markets.
The oft-used phrase ‘data is king’ may have become something of a cliché, but it certainly stands up when examining its role in the post-trade industry. According to Clearstream, it is projected that, by 2025, 44 per cent of data will be created by analytics and AI, and 30 per cent will be real time. There will be around 11 million data professionals in the EU27 alone. As Sharma says, data is truly becoming a ‘new asset class’.
“With the use of advanced analytics and newer technologies, major players are beginning to create a clearer view of their own data landscape,” she adds.
“There is increased focus on proactive and predictive client solutions, with amplified requirements around data quality and governance. Through data and connectivity, organisations are beginning to identify opportunities for collaboration with clients, counterparties and other market players, to support new business growth.”
The increase in regulatory scrutiny in recent years has seen institutions necessarily evolve their offering with an sharper focus on the safety and efficiency of securities settlements. Sharma says there is increased pressure on Clearstream’s clients, and itself as a business, to deliver less settlement fails.
“There has been a significant push towards a shorter settlement cycle; from T+2, now we are talking about T+1. Mandatory cash penalties and buy-ins for settlement fails and reporting is now in place,” she says. “So, to support our clients, at Clearstream we have recently launched settlement efficiency and prediction services, where clients will have the opportunity to not only understand how efficient their settlements are, but also predict which instructions may potentially fail.
“This allows our customers to take
Priya Sharma from Clearstream describes why she believes good quality data could solve the significant challenges around Europe’s new CSDR regulation
proactive actions and avoid the cost of failed trades and penalties.”
These tools were announced in July this year: a settlement dashboard and a settlement prediction apparatus, offering insights into past, present and future settlements. The dashboard analyses markets, asset classes and counterparties in order to benchmark their efficiency, while the prediction tool uses artificial intelligence (AI) to anticipate future settlements.
A partnership with securities and finance automation provider Pirum also illustrates this drive to use technology and data to increase ease of use and efficiencies for its customers. Clearstream and Pirum have extended their services to offer new collateral connectivity, ‘allowing mutual clients to automate the calculation, matching, submission and validation of collateral requirements and allocations for securities lending, repo and OTC (over-the-counter) derivative transactions’.
And, in the first quarter of 2022, Clearstream started work with SWIFT on its tokenised asset pilot (see also page 80 of this issue). So, the Deutsche Börse AG-owned company is on the front foot with innovation, which is just as well, because a consistent theme running through financial interactions recently, is shifting customer expectations.
Whether it be the impact of COVID-19 or adoption of new technology in their
everyday lives, customers want and demand quicker and more efficient services. This has meant that financial players are facing increasing pressure to adapt the way in which they operate. Citing the example of data scientists who used to be specialists but are now integrated within product and operations departments, Sharma says Clearstream is reacting positively to these market forces.
“The more users come to know what AI can do, what machine learning can do, there is more appetite for it, so the challenge is really to ensure we have the right infrastructure,” she says. “I have seen that major players are already investing in data infrastructure, in streamlining it; Cloud has become the norm, data lakes, and so on. The first thing is to get the data infrastructure right and, once the flow of data is streamlined, it will be easier for data scientists to build those solutions.
“Second, and more importantly, is the need for data quality and overall data governance. With the increase in data, it has become very important that we manage it, and its quality, very well. While we build data as a growth driver internally and for our clients, it is imperative that it is curated by trusted and secure market infrastructure.”
So, with customer demand, the need to satisfy CSDR settlement regulation and the relentless onward march of technology, it is, by any reckoning, a super-busy and exacting period for the payments market. But what of the future? Aside from the obvious innovations – Cloud, AI, machine learning et al – are there any emerging trends that Sharma sees coming to the fore?
“The trend of buy-side is now towards passive investment. This is encouraging a need for data-driven investment models, including valuation, sentiment analysis and trends,” she says. “ESG [environmental, social and governance requirements, which encourage companies to act responsibly] is picking up, so we’re looking at ESG data. Data monetisation is becoming a focus, too; it’s not easy, however, there is a lot of partnership potential that’s available in the industry today, and that is something market players are becoming interested in. Pre-emptive and predictive data solutions is another focus area for new product development.
“I believe we have an important role to play, with, of course, trust and safety at the top of our priorities. Within those boundaries and regulations that we need to adhere to, there is room to enhance and create a much more efficient environment internally within operations, and to proactive reporting and data solutions for our clients.”
